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Stop making fund managers society's go-to scapegoats

Asset managers find themselves at the sharp edge of the ESG debate because of their perceived ability to influence companies.

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A fund manager's survey of its customers found that fewer than 10 per cent would be willing to accept the risk of lower returns for investing in an ESG fund.

SUPPOSE you're an asset manager deciding whether to finance a West African oil company. The debt will be government guaranteed and offers high yields with little risk of not being repaid, which is good for returns. The project will create jobs, which is good from a social standpoint. But it's investing in petrochemicals, which are bad for climate change. Should you sign the deal?

The example highlights the difficult balance investors face when trying to integrate environmental, social and governance principles in their asset allocation strategies.

In the end, Aviva Plc approved the Ivory Coast transaction, concluding that it would improve the environmental efficiency of the oil refiner, according to Mark Versey, chief investment officer for the insurer's investment unit. But it illustrates how trying to adopt rule-based strategies that can account for the ESG variables in such decisions would be "a nightmare," Mr Versey told a seminar organised by the Investment Association in London this week.

Asset managers find themselves at the sharp edge of the ESG debate because of their perceived ability to influence the companies they invest in. As a result, the industry is "drowning in consultations" about the standards, according to Jessica Ground, global head of stewardship at Schroders Plc.

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Some of the objectives ESG seeks to achieve are incompatible with each other. Take the 17 Sustainable Development Goals outlined by the United Nations, which investment firms are being encouraged to be mindful of when allocating capital. "We do not think there is an efficient way to map the SDGs onto a portfolio in such a way as to say that it delivers on the goals," strategists at UBS Group AG said in a research report last week.

A portfolio aligned with Goal 14 (climate action) could be structured to focus on clean energy and clean technologies. However, some of the new technologies facilitating low-carbon mobility are likely to bring about radical change in job markets. Unemployment has a number of knock-on effects that potentially run counter to the goals, if conditions are not in place to help people adapt.

A JPMorgan & Co. survey of 227 institutional investors managing over US$700 billion published this week showed that 65 per cent aren't involved in ESG products, and don't plan to be this year.

That partly reflects the geographical split of the survey, with about three-quarters of the respondents based in the US which has been slower than either Europe or Asia to embrace ESG.

But there's also some justified scepticism about how much of the burden of combating climate change, improving gender balance among senior management and achieving other societal goals should fall on the asset management industry. Investment firms are merely the stewards of capital; it's far from clear that the ultimate owners of the money - namely you and me - are as committed to saving the planet and reforming business, much as we should be.

David Russell, head of responsible investment at the Universities Superannuation Scheme, the UK's largest pension fund with about £64 billion (S$114 billion) of assets, says a survey of 10,000 of his members suggested half of them would invest in an ethical pension plan. Once one was introduced, "substantially" fewer actually chose the product, he said.

Kaisie Rayner, a manager for responsible investment and fund development at Lloyd's Banking Group Plc's Scottish Widows unit, cited a recent survey of its customers in which fewer than 10 per cent said they'd be willing to accept the risk of lower returns for investing in an ESG fund.

Nevertheless, regulators are beefing up their efforts to compel asset managers to weave more ESG considerations into their business. If the industry doesn't come up with its own definitions, "they will be imposed upon us," says USS' Mr Russell.

Edwin Schooling-Latter, director of markets at the Financial Conduct Authority, says the regulator's existing framework focuses on financial risks, but that non-financial exposures may eventually be included. ESG, for example, doesn't feature in the Senior Managers Regime introduced in 2016 to make executives in finance personally accountable for the decisions they make, but the FCA should "have that conversation", Mr Schooling-Latter told this week's Investment Association seminar.

The financial world is used to dealing in cold, hard numbers, which are difficult enough to explain to the end users of savings products. The renewed emphasis on socially responsible investing involves much fuzzier and less tangible concepts.

Yes, asset managers can improve their engagement with companies to help make the world a better place. But including non-financial targets in the objectives of investment products is fraught with difficulty. The fund management industry should resist becoming the scapegoat for all of society's ills. BLOOMBERG

  • This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.